HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

<p>While <a href="https://www.smartkarma.com/entities/china-southern-airlines-co-ltd" target="_blank" data-smartkarma-citation="entities:1078:1" rel="noopener">China Southern Airlines (1055 HK)</a> continued to show YoY traffic outperformance in Jan, we see the sequential softening in domestic passenger traffic will weigh on the airline in 1Q21. Its share price outperformance against <a href="https://www.smartkarma.com/entities/air-china-ltd-h" target="_blank" data-smartkarma-citation="entities:8239:1" rel="noopener">Air China Ltd (H) (753 HK)</a> since 2020 will soon become increasingly difficult to sustain with potentially better traffic turnout at the latter, driven by the gradual recovery in international traffic.</p><p>CSA's passenger load factor outperformance in the month is also partly attributed to the high base for both Air China and <a href="https://www.smartkarma.com/entities/china-eastern-airlines-co-h" target="_blank" data-smartkarma-citation="entities:1079:1" rel="noopener">China Eastern Airlines Co (H) (670 HK)</a>, and such favourable factor will turn dimmer as we move into the next few months. Our <a href="https://www.smartkarma.com/insights/2021-high-conviction-pair-trade-long-air-china-753-hk-short-china-southern-1055-hk" target="_blank" data-smartkarma-citation="insights:45584" rel="noopener">2021 High Conviction: Pair Trade - Long Air China (753 HK), Short China Southern (1055 HK)</a> continues to hold; and in fact, CSA's share price strength has created an even better timing for set up this trade, in our view.</p>

While China Southern Airlines (1055 HK) continued to show YoY traffic outperformance in Jan, we see the sequential softening in domestic passenger traffic will weigh on the airline in 1Q21. Its share price outperformance against Air China Ltd (H) (753 HK) since 2020 will soon become increasingly difficult to sustain with potentially better traffic turnout at the latter, driven by the gradual recovery in international traffic.CSA's passenger load factor outperformance in the month is also partly attributed to the high base for both Air China and China Eastern Airlines Co (H) (670 HK), and such favourable factor will turn dimmer as we move into the next few months. Our 2021 High Conviction: Pair Trade - Long Air China (753 HK), Short China Southern (1055 HK) continues to hold; and in fact, CSA's share price strength has created an even better timing for set up this trade, in our view.

Chinese Airlines: A Reversal of Relative Performance Between the Airlines Gets Closer

Equity Bottom-Up

Guangzhou Baiyun International Airport / Equity Bottom-Up

<p>Jan traffic for <a href="https://www.smartkarma.com/entities/guangzhou-baiyun-international-airport" target="_blank" data-smartkarma-citation="entities:10819:1" rel="noopener">Guangzhou Baiyun International Airport (600004 CH)</a> does not look encouraging due to the local COVID-19 cases in China induced softening in domestic air travel demand. Aircraft movement and passenger throughput was down 23.6% and 43.8% YoY, respectively, reflecting various local governments' no cross-province travel recommendation and the distortion from a later Chinese New Year than 2020. Cargo throughput, however, holds up well.</p><p>We believe GBIA will fare better than its peers in Jan-Feb traffic, as southern China has not reported any local COVID-19 case. GBIA's share price has been hit by the spillover effect of the unfavourable duty free agreement signed by <a href="https://www.smartkarma.com/entities/shanghai-international-airport-co-ltd" target="_blank" data-smartkarma-citation="entities:6511:1" rel="noopener">Shanghai International Airport (600009 CH)</a> which we think is unwarranted. On a cheaper 1.5x P/B, we see GBIA outperform SIAC in the near term given its more stable earnings mix and better profitability.<a href="https://www.smartkarma.com/entities/thai-airways-international" target="_blank" data-smartkarma-citation="entities:18317:1" rel="noopener"></a></p>

Jan traffic for Guangzhou Baiyun International Airport (600004 CH) does not look encouraging due to the local COVID-19 cases in China induced softening in domestic air travel demand. Aircraft movement and passenger throughput was down 23.6% and 43.8% YoY, respectively, reflecting various local governments' no cross-province travel recommendation and the distortion from a later Chinese New Year than 2020. Cargo throughput, however, holds up well.We believe GBIA will fare better than its peers in Jan-Feb traffic, as southern China has not reported any local COVID-19 case. GBIA's share price has been hit by the spillover effect of the unfavourable duty free agreement signed by Shanghai International Airport (600009 CH) which we think is unwarranted. On a cheaper 1.5x P/B, we see GBIA outperform SIAC in the near term given its more stable earnings mix and better profitability.

Guangzhou Baiyun Intl Airport (600004 CH): On a Better Playing Field

Smartkarma Research Team, Smartkarma

Smartkarma Research

Smartkarma Research Team

Smartkarma

Smartkarma unites the fragmented investment industry, connecting institutional investors, independent research providers, and corporates within a single network.

Research Reinvented

<p>For our next Webinar, we welcome back Insight Provider <a href="https://www.smartkarma.com/profiles/osbert-tang-cfa" target="_blank" data-smartkarma-citation="accounts:3879" rel="noopener">Osbert Tang, CFA</a> who will discuss his 2021 high-conviction idea as outlined in his Insight, <a href="https://www.smartkarma.com/insights/2021-high-conviction-pair-trade-long-air-china-753-hk-short-china-southern-1055-hk" target="_blank" data-smartkarma-citation="insights:45584" rel="noopener">2021 High Conviction: Pair Trade - Long Air China (753 HK), Short China Southern (1055 HK)</a>. Is it still a viable trade? Tune in as we explore the opportunity and the rationale behind it.</p>
<h3>The webinar was hosted on Wednesday, 10 February 2021, 17:00 SGT/HKT.<a href="https://share.hsforms.com/1H9pFZOB-RF2J00kbvMmxcw2c5gj?zoom_webinar_id=89740086798" target="_blank" rel="noopener"></a>
</h3>
<p>Watch the session here:</p>
<p><iframe src="https://www.youtube.com/embed/xGlmHC0P6TA" width="560" height="315" title="YouTube video player" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture" allowfullscreen="allowfullscreen"></iframe></p>
<p>Or subscribe to our podcast and listen on the go:</p>
<p><iframe src="https://open.spotify.com/embed/episode/70oTesSipKcj3xDWbIwQFK" width="100%" height="232" frameborder="0" allowtransparency="true" allow="encrypted-media"></iframe></p>
<p>Osbert Tang is an equity analyst with over 20 years of experience, focusing on China transport, infrastructure, industrials, and utilities. He has been based in Shanghai since 2003, accumulated more than 15 years of on-ground knowledge on the Chinese economy and financial markets, and has a wealth of contacts with China corporates and government entities.</p>

For our next Webinar, we welcome back Insight Provider Osbert Tang, CFA who will discuss his 2021 high-conviction idea as outlined in his Insight, 2021 High Conviction: Pair Trade - Long Air China (753 HK), Short China Southern (1055 HK). Is it still a viable trade? Tune in as we explore the opportunity and the rationale behind it.
The webinar was hosted on Wednesday, 10 February 2021, 17:00 SGT/HKT.

Watch the session here:

Or subscribe to our podcast and listen on the go:

Osbert Tang is an equity analyst with over 20 years of experience, focusing on China transport, infrastructure, industrials, and utilities. He has been based in Shanghai since 2003, accumulated more than 15 years of on-ground knowledge on the Chinese economy and financial markets, and has a wealth of contacts with China corporates and government entities.

Smartkarma Webinar | Pair Trade - Long Air China, Short China Southern: Still an Opportunity?

<p>The big three Chinese airlines have announced the range of their expected FY20 losses over the weekend, and the general indication is that the 4Q20 results have returned to wider losses after an improvement in 3Q20. We rank their 4Q20 performance in the following descending order: <a href="https://www.smartkarma.com/entities/china-eastern-airlines-co-h" target="_blank" data-smartkarma-citation="entities:1079:1" rel="noopener">China Eastern Airlines Co (H) (670 HK)</a> &gt; <a href="https://www.smartkarma.com/entities/china-southern-airlines-co-ltd" target="_blank" data-smartkarma-citation="entities:1078:1" rel="noopener">China Southern Airlines (1055 HK)</a> &gt; <a href="https://www.smartkarma.com/entities/air-china-ltd-h" target="_blank" data-smartkarma-citation="entities:8239:1" rel="noopener">Air China Ltd (H) (753 HK)</a>. Although we think the market should have anticipated the deterioration, the trend is not promising and we believe there will be near-term pressure on the sector's performance.</p><p>In our view, weaker domestic passenger traffic, resurgence in cost pressure and fading positive impact of Rmb appreciation are some of the headwinds faced by the sector in 1Q21. However, we think this is a good opportunity to set up our high conviction trade - <a href="https://www.smartkarma.com/insights/2021-high-conviction-pair-trade-long-air-china-753-hk-short-china-southern-1055-hk" target="_blank" data-smartkarma-citation="insights:45584" rel="noopener">2021 High Conviction: Pair Trade - Long Air China (753 HK), Short China Southern (1055 HK)</a>. </p>

The big three Chinese airlines have announced the range of their expected FY20 losses over the weekend, and the general indication is that the 4Q20 results have returned to wider losses after an improvement in 3Q20. We rank their 4Q20 performance in the following descending order: China Eastern Airlines Co (H) (670 HK) &gt; China Southern Airlines (1055 HK) &gt; Air China Ltd (H) (753 HK). Although we think the market should have anticipated the deterioration, the trend is not promising and we believe there will be near-term pressure on the sector's performance.In our view, weaker domestic passenger traffic, resurgence in cost pressure and fading positive impact of Rmb appreciation are some of the headwinds faced by the sector in 1Q21. However, we think this is a good opportunity to set up our high conviction trade - 2021 High Conviction: Pair Trade - Long Air China (753 HK), Short China Southern (1055 HK). 

Chinese Airlines: Initial FY20 Results Suggest Tough Market Has Already Begun

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Cathay Pacific Airways / Equity Bottom-Up

<div>
<p>After Hong Kong's government planned to impose a 14-day quarantine and seven-day medical surveillance on all aircrew, <a href="https://www.smartkarma.com/entities/cathay-pacific-airways-ltd" target="_blank" data-smartkarma-citation="entities:243:1" rel="noopener">Cathay Pacific Airways (293 HK)</a> <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0125/2021012500513.pdf" target="_blank" rel="noopener">announced</a> it would have a "<em>significant impact on our ability to service our passenger and cargo markets</em>" and would add <em>"a further increase in our cash burn of approximately HK$300-$400 million per month</em>".</p>
<p>In effect, the uptick in cost from these new quarantine measures negates the cost savings from the cessation of Cathay Dragon announced last October.</p>
<p>Cathay has now <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0128/2021012800096.pdf" target="_blank" rel="noopener">announced</a> the issuance of a HK$6.74bn 2.75% convertible bond due 2026.</p>
<p>The conversion price is HK$8.57/share, a 30% premium to the last close of HK$6.59/share. Assuming full conversion, these shares represent 10.89% of shares out on a fully diluted basis.</p>
<p>Upon conversion, together with the exercise of warrants held by the Hong Kong government, <a href="https://www.smartkarma.com/entities/swire-pacific-ltd-cl-a" target="_blank" data-smartkarma-citation="entities:10433:1" rel="noopener">Swire Pacific (A) (19 HK)</a> and <a href="https://www.smartkarma.com/entities/air-china-ltd-h" target="_blank" data-smartkarma-citation="entities:8239:1" rel="noopener">Air China Ltd (H) (753 HK)</a>'s effective stakes would decline to 37.91% and 25.27% respectively from 45.00% and 29.99% currently. </p>
<p>Cathay's shares are up 25% in the past three months - before this latest fund-raising proposal - in line with a basket of peers of 28%. Year-on-year, Cathay is down 33%, bang in line with its peer basket.</p>
</div>
<div>
<p>Separately <a href="https://www.smartkarma.com/entities/swire-pacific-ltd-cl-a" target="_blank" data-smartkarma-citation="entities:10433:1" rel="noopener">Swire Pacific (A) (19 HK)</a>'s discount to NAV has narrowed to 43% from a low of 55% last November.</p>
</div>
<div>
<p>As always, more below the fold.</p>
</div>


After Hong Kong's government planned to impose a 14-day quarantine and seven-day medical surveillance on all aircrew, Cathay Pacific Airways (293 HK) announced it would have a "significant impact on our ability to service our passenger and cargo markets" and would add "a further increase in our cash burn of approximately HK$300-$400 million per month".
In effect, the uptick in cost from these new quarantine measures negates the cost savings from the cessation of Cathay Dragon announced last October.
Cathay has now announced the issuance of a HK$6.74bn 2.75% convertible bond due 2026.
The conversion price is HK$8.57/share, a 30% premium to the last close of HK$6.59/share. Assuming full conversion, these shares represent 10.89% of shares out on a fully diluted basis.
Upon conversion, together with the exercise of warrants held by the Hong Kong government, Swire Pacific (A) (19 HK) and Air China Ltd (H) (753 HK)'s effective stakes would decline to 37.91% and 25.27% respectively from 45.00% and 29.99% currently. 
Cathay's shares are up 25% in the past three months - before this latest fund-raising proposal - in line with a basket of peers of 28%. Year-on-year, Cathay is down 33%, bang in line with its peer basket.


Separately Swire Pacific (A) (19 HK)'s discount to NAV has narrowed to 43% from a low of 55% last November.


As always, more below the fold.


Cathay Pacific (293 HK): Back To Terminal

China

Air China Limited provides passenger, cargo, and airline-related services in China.  The Company is primarily based in Beijing and a major hub for domestic and international air transportation.  Air China's airline-related services include aircraft maintenance, repair, overhaul service, ground services, and in-flight catering services.

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Air China Ltd (H) (753 HK)

Chinese Airlines: A Reversal of Relative Performance Between the Airlines Gets Closer

CSA has better traffic and load performance in Jan 2021, but further significant outperformance against Air China appeared to be increasingly...

Osbert Tang, CFA

Guangzhou Baiyun Intl Airport (600004 CH): On a Better Playing Field

Weak Jan traffic reflected poor domestic air travel appetite but GBIA should fare better than SIAC and BCIA. It has less exposure to duty free and...

Osbert Tang, CFA

Smartkarma Webinar | Pair Trade - Long Air China, Short China Southern: Still an Opportunity?

Join us on 10 Feb, 5PM SGT as we welcome back Insight Provider Osbert Tang, who will discuss his 2021 high-conviction idea, as outlined in his...

Smartkarma Research

Chinese Airlines: Initial FY20 Results Suggest Tough Market Has Already Begun

Chinese airlines posted weak 4Q20 result ranges and this is expected to put near-term pressure on share prices. However, we believe Air China is in...

Osbert Tang, CFA

Cathay Pacific (293 HK): Back To Terminal

Vaccine rollout and a hard turnaround in global tourism/air travel appear highly optimistic. I think Cathay has further to fall from here.

David Blennerhassett

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